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    overcoming paralysis

    Overcoming information paralysis

    Those sharp ups and downs that the Covid-19 pandemic has imposed on our sharemarket has caused a lot of us to sit in a state of investment paralysis, wondering what to do.

    Is the worst over or are we in for another major dip? We’re in uncharted waters with COVID-19 so no one really knows, so no wonder we’re torn between selling, sitting tight or buying.

    And the default position, for many, is to sit on one’s hands.

    That’ s not the worst course of action but if we’re not doing anything in the short term, it’s worth having a long hard think about investment aims and intentions.

    I’ve drawn up a list of things to consider to avoid investment paralysis.

    One, Ignore the noise.

    Our sharemarket’s been regularly moving up and down by two per cent or even more in a day, driven by everything from reports of a COVID-19 vaccine discovery, to riots in the US, to concerns about Chinese pressure on Hong Kong.

    Not surprisingly most news reports on the sharemarket focus on the biggest movers on the day, and why they moved, but it’s more useful to find an overview examining longer term trends.

    Are you investing on a day by day basis? Unless you are a day trader, you’re not, so consider if it’s wise to base a long-term investment approach based on short term news.

    But isn’t the sharemarket much more risky than putting money in bonds or in the bank?

    In the short term, yes. But see below.

    Two, Invest for the Long Term

    A recent report by AMP chief economist Shane Oliver notes that over very long periods, shares have provided significantly superior returns to most alternative asset classes.

    “Since 1900, Australian shares have returned nearly 12 per cent per annum compared to 6 per cent for bonds and 4.8 per cent for cash,” he wrote.

    As he noted, the real benefit for share owners is the combination of capital growth and the miracle of compound interest, whereby the dividends from the shares are reinvested and so dividends end up being paid on dividends.

    Earning say 5 per cent a year, it takes a long time for that phenomenon to kick in, but it happens more than twice as fast with a well constructed share portfolio earning 12 per cent.

    And that’s not just in good years: that’s the long term average, he notes.

    “Although shares do not outperform cash and bonds over all 10 year periods, they invariably have done so over 20 year periods,” he wrote, pointing to a timeframe that includes the most recent decades.

    Three,  Don’t lose your nerve

    One sure fire way to lose money on the sharemarket is to sell when the market’s having one of its periodic downturns (see graph)

    Investors battling feed and greed

    Source: eInvest

    As the graph shows, that strategy usually means that you “sell at the bottom and buy back at the top”, once the market gets back into recovery mode.

    The Oracle of Omaha, Warren Buffett, has long been regarded as the maestro of market timing, buying when others were selling and vice versa.

    Some people thought he had lost his touch because as the COVID pandemic took hold he startled his fans by very publicly selling all his company Berkshire Hathaway’s shares in airlines, including the four biggest airlines in the US.

    While that looks like a prima facie case of breaking his own rule, he waited until his company’s annual meeting on May 2 to reveal he had sold $US6 billion worth of airline shares in April.

    Which is not at all the same as selling at the bottom of the market.

    Four, consider balancing yield with capital growth

    The benefits of dividend imputation have meant that until the recent pandemic came along, shares in the Big Four banks were providing a yield of around 8 per cent to retirees. What’s not to like, as the saying goes.

    But the COVID-driven rout of share prices has reminded us that there’s more to shares than just dividends. Bank share prices have in many cases dropped by around 30 per cent at the prospect of reduced and delayed dividends.

    They are beginning to recover but it will be while before they are paying anything like the dividends they were.

    In that case, don’t just dive for a stock paying a bigger franked dividend. Keep an eye on its chances of capital growth. There’s many a company that has pushed out big dividends to the detriment of its long term earning potential. A clue to watch out for is a high payout ratio, being the ratio of dividends to actual earnings. Lower is better.

    There are over 2000 stocks listed on the ASX and only four of them are big banks.

    Five, Consider liquidity

    Bank deposit rates are pretty miserable at the moment but there’s an argument for keeping a solid buffer of investable cash in this market. It’s all very well seeing a bargain out there, and history will show that there are plenty out there.

    But if you have to sell a beaten-down stock to raise the cash to pay for it, that changes the arithmetic significantly.

    Six, Take advice, and diversify

    A good financial adviser will more than pay for themselves in the long run. Tax and entitlement rules change so often it’s almost a full time job to keep on top of them, and that’s before making any specific investment decisions. Bear in mind that their fees are tax deductible.

    Diversification? Consider adding that to the top of your investment list.

     

    Disclaimer: Please note that these are the views of the writer, Andrew Main and is not financial advice.

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